What is a Non-Disclosure Agreement?
A Non-Disclosure Agreement ("NDA") is a legally enforceable agreement, typically signed by employees, contractors, or business partners, that obligates the parties involved to keep information confidential. NDAs are used to protect sensitive, confidential information and to prevent the information from being disclosed publicly.
NDAs can be used at any time that confidential information is shared. For example, suppliers, vendors, and agencies that provide services for a company may carry a danger of leaked information. NDAs can be used with business partners and venture capitalists as well, such as when confidential information is exchanged with potential buyers before an acquisition (also known as a "breakup piece of paper").
NDAs can also be used in the employment context to protect valuable proprietary information (e.g., business plans, inventions, or trade secrets) from competitors and former employees. Consequently, it is important for businesses to create proper agreements to protect this information. Additionally, NDAs can have far-reaching consequences; for example, in some cases, NDAs may inhibit one’s ability to report future sexual harassment. Notably, however, there has been a recent move by the New York State legislature to prevent the use of NDAs in the workplace to prohibit employees from reporting allegations of sexual harassment. Although this would likely not affect the enforcement of NDAs outside the sexual harassment context (e.g., to protect confidential business information), it may be worth exploring this provision before preparing an NDA.
For the purposes of this article, we will primarily address NDAs in the business context. Fundamental elements of an NDA include the timing of the agreement, the definition of confidential material, the obligations of the parties, the exceptions to the obligations, and the term of the agreement. Each of these can be explored further below:
- Timing of the NDA: The timing of the NDA is critical. Typically, businesses may provide or share confidential information with either customers or vendors before an NDA is executed. For instance, we frequently see situations where the customer is obligated to pay the vendor a percentage of their profits in exchange for a contract to produce goods. In such cases, there is an opportunity to negotiate for more confidentiality protection up front prior to sharing confidential information with the vendor.
- Definition of confidential material: The definition of confidential material is the most crucial term in any NDA. If one does not adequately set forth what constitutes confidential information, it may significantly limit the NDA’s enforceability . To be properly defined, the information must be sufficiently specific. In other words, generic lists and terms are often not enough to establish what is protected and what is not. When selecting what information to include, a non-specific definition that is broad may be upheld by courts, but just to be sure, the scope of the definition must be clearly stated. For example, terms like "confidential information" and "trade secrets" are effective if they are adequately explained. An example of a broad definition may include: "all ideas, concepts, business plans, analysis notes, devices, specifications, designs, trademarks, patents, patent applications, copyrights, trade secrets, understandings, working know-how, and all similar or related information."
- Obligations of the parties: There are three obligations of the parties to an NDA. First, the information discussed in the NDA must be kept confidential and cannot be disclosed to any third parties. These obligations can be limited to only confidential information belonging to the party providing the information, or can be expanded to apply to all confidential information received from any source. Second, the receiving party cannot use that confidential information for commercial purposes. For example, if an NDA requires the recipient of confidential information (the "Receiving Party") to use that information exclusively for its intended purpose, the Receiving Party is restricted from sharing that information with any outside source or using that information for the benefit of another source. Third, the Receiving Party is obligated to return all of the confidential information delivered to the Receiving Party at the end of the relationship.
- Exceptions to the obligations: There are some exceptions to each party’s obligations with regard to confidentiality. An exception to the obligation to maintain secrecy applies if the information that a Receiving Party receives is already known or in the public domain, or if the Receiving Party lawfully obtains the information from another source. Additionally, if the Receiving Party is required to disclose the information by a valid court order or subpoena, the Receiving Party can make the disclosure. If that occurs, the Receiving Party must promptly notify the releasing party so they can try to prevent such a disclosure.
- Term of the agreement: NDAs also have a duration. The duration of the agreement establishes how long the obligations discussed above will continue for the parties involved. Between parties with existing relationships (e.g., a business and its employee), the term of the agreement may continue indefinitely, but may end upon termination of that relationship.
Key Elements of a Non-Solicitation Agreement
The central principle of a non-solicitation agreement is that it prevents one or both parties from soliciting the employees or the clients of the other. For example, an employer may require a departing employee to not solicit its clients for a specified period of time after termination of employment. Likewise, parties to a non-competition agreement can agree to a mutual non-solicitation provision in the event that one of them seeks employment with a competing business in an area where neither would be permitted to have a non-competition.
Non-solicitation provisions are less frequently challenged as compared to non-competition provisions, but this does not mean they will necessarily be upheld by a court. Careful consideration needs to be given to the purpose and enforceability of a non-solicitation provision to establish that its benefits outweigh the impact on personal or professional freedom. In any employment or commercial relationship there are often legitimate reasons for restricting competition. For example, a non-solicitation agreement between the parties to prevent one from recruiting employees from the other is a common form of non-solicitation provision. While courts will not enforce a non-solicitation clause if it goes further than necessary to protect a legitimate business interest, a non-solicitation clause may not be struck down as a restraint on trade if it imposes a reasonable restraint measured by its duration and geographical scope.
When drafting a non-solicitation agreement, be specific as to what is to be protected by the agreement. The agreement should broadly state what is to be protected but narrow the circumstances in which that provision will apply. For example, instead of protecting against any and all client contact, the agreement can protect against the referral of specific clients with whom the drafter has dealt with over the course of their employment.
Non-Disclosure Agreement vs. Non-Solicitation
Although non-disclosure and non-solicitation agreements are sometimes discussed together, they are not the same. While both types of contracts are frequently entered into before a company hires an employee or an independent contractor, their provisions and purposes are different.
A non-disclosure agreement is directed at preventing a party from sharing a specific kind of confidential information with others. For example, if you develop inventions or products, disclose proprietary information to customers or collaborators, or have information that could be used by your competition to gain an unfair advantage, you might ask an employee, consultant or other third party to sign a non-disclosure agreement before discussing your confidential information. While the law provides some measures of protection against individuals who steal confidential information, in many cases, a strong non-disclosure agreement with a third party is the only way to deter the disclosure or theft of your sensitive and confidential information. Non-disclosure provisions generally limit only the sharing of your confidential information with other named parties who are specifically covered by the NDA. Non-disclosure provisions also usually do not protect against others using the same information for their own purposes or improperly reverse-engineering your product or invention.
A non-solicitation agreement, on the other hand, is not limited to prohibiting the sharing of confidential information but prohibits the solicitation of your employees, customers or contractors, and is not limited to confidential information. Non-solicitation provisions are typically more broad than non-disclosure provisions. However, when using non-solicitation provisions it is still very important that you specify that the restriction is narrowly tailored in scope to avoid a court finding that the restriction is overly broad. Non-solicitation agreements can be both useful and necessary for protecting against the loss of your sensitive information to competitors.
Enforceability of Non-Disclosure and Non-Solicitation Agreements
Non-disclosure and non-solicitation agreements are broadly enforced in Florida, but, like any contract, they must satisfy certain legal requirements to be enforceable. Typically, these types of agreements are subject to civil enforcement in court through either injunctive relief or an award of money damages. However, Florida will not enforce them if doing so would be contrary to the public policy of the state. At least with respect to covenants not to compete, Florida Statutes §542.335(1)(j) prohibits the enforcement of any noncompete agreement or covenant that restricts competition unless "the entire record" demonstrates that it will serve a "legitimate business interest." Seemingly similar standards are applicable to non-disclosure and non-solicitation agreements.
The most important factors for a court to consider when determining the enforceability of a non-disclosure or non-solicitation agreement are reasonableness, scope and duration. The court can only enforce an agreement that is reasonable, not overbroad in geographic area or duration, and necessary to protect the legitimate business interests of the employer. Moreover, a court cannot require a party to perform services that are not reasonable in light of the circumstances.
In many ways, non-compete agreements are enforced even more rigorously because of the specific factors that Florida Statutes §542.335(1) requires courts to consider in determining whether there is a "legitimate business interest." As the statute states: ". . . there is a rebuttable presumption that any restrain based on any of the following grounds is reasonably necessary to protect a legitimate business interest: . . . . . . (j) The significant investment of time and money by the employer in research and development of trade secrets or confidential information."
Alternatively, the statute specifically provides that a business interest is not legitimate because it is merely "to avoid ordinary competition." If a party can establish that the business interest is indeed legitimate, then the agreement is presumed to be enforceable, unless either the restraint sought is overbroad or its enforcement would be contrary to public policy. If the restraint does not pass muster under this two-part test, then any economic restrictions imposed on work activities will be considered unreasonable. This is particularly true if a court finds that a non-compete agreement is greater than necessary to protect a legitimate business interest or to that it is unreasonable because of the scope it seeks to impose on a former employee. For example, a thirty mile non-compete may be appropriate for an executive who has worked for his employer for several years, but may not be appropriate for a recent college graduate hired by the business. Moreover, a one year non-compete may be reasonable if the employee had access to the business’s trade secrets at the time of separation, but less so if the employee had not yet been given access to the trade secrets when they separated from the company.
Likewise, if the agreement contains an overly broad provision regarding the scope or duration of the restriction, or permits the competing business activities to include major metropolitan areas rather than geographically defined regions, it will likely be unenforceable even if it has been approved by a court. A court will refuse to enforce any restraint or agreement found to be against public policy, particularly when there is a plausible argument that the restraint in question is the type that unfairly inhibits competition. Floridians therefore remain free to compete in a lawful manner, unless and until the party with whom they currently compete persuades a court otherwise.
However, in practice courts may not always be willing to strike out only part of an overly broad agreement in order to render it enforceable. That determination is likely based on the factual context of the case and the specific drafting of the agreement in question. While the court may strike out portions of a non-compete agreement that do not pass muster under Florida Statutes §542.335, it is less likely to do so where there is no clear provision specifying the scope of the restraint to be enforced in the event of an overbroad clause. If the overbroad clause constitutes the entire contract, then the entire agreement may fail and the employer will lose under any circumstances.
Employers, executives, and employees should be aware of the law when entering into any non-disclosure, non-solicitation or competition agreement and should seek the advice of legal counsel experienced in this area.
How to Draft NDAs and Non-Solicitation Agreements
A non-disclosure agreement should always be in writing, with clearly defined terms, including:
- who are the parties affected by the NDA;
- what information is to be kept confidential (including how it will be communicated, stored and retrieved), and for how long;
- the agreed upon purpose of the NDA;
- legal remedies available to the NDA parties if there is a breach, such as: injunctions, accounting of profits, additional rights to damages and/or loss of use of the confidential information that forms the subject matter of the NDA; and
- the governing jurisdiction in the event of a claim.
There is a key distinction between the types of confidential information protected by common law, and information protected by contract law. Common law protection extends only to confidential information that meets two requirements: first, the information must be secret; and second, the holder of information must take reasonable precautions to protect its confidentiality. Hence the need for a written contract. Contractual protection has much broader protection . For example: a NDA can incorporate a definition of confidential information that does not depend on reasonable precautions; or protect confidential information that has been usurped from the owner; or even information that would not be considered secret according to common law standards.
The courts will examine the nature of the information sought to be kept confidential when determining whether the restrictions contained in an NDA are appropriate. If the restricted area of business is too broad, or the period of prohibition is unreasonably lengthy, the restrictions may be challenged.
Common pitfalls in drafting NDAs include not including a required jurisdiction clause, limiting the scope of the confidential information to be protected, or not providing adequate legal remedies if there is a breach. Also beware of restrictions on competition that are not reasonable – the courts are quick to strike down unreasonable restrictions.
Non-solicitation clauses include those that restrict: a party from soliciting another party’s employees, customers, suppliers, clientele, etc. These clauses are typically incorporated into shareholder agreements, employment contracts, joint ventures and more. Restrictions are more likely to be enforced if they are reasonable, clear, limited in time, and not contrary to public policy.
Common Issues and Disputes
One of the most common issues that arises with the enforcement of these agreements is whether the former employee/group has complied with the term of the agreement, or taken actions that are so closely related to what is prohibited that a violation has occurred. This can lead to a difficult factual determination and sometimes a battle of expert witnesses who might opine on behalf of both sides as to what the proper standard should be and how a violation has occurred. In general, the employer’s costs to pursue such a contract claim can be substantial. The cost to prosecute, even a temporary restraining order, on these kinds of disputes can often exceed $100,000 even if you do not end up going to trial. Moreover, because these claims typically are heard in the federal district court, it may be exceedingly difficult to acquire discovery and obtain a quick resolution of the case based on motion practice. When an agreement has been violated, it is important to seriously consider and weight whether the costs of the litigation will outweigh the potential benefits once a judgment has been obtained. In other words, when a former employee violates a non-compete, you might obtain a settlement or judgment but if he or she cannot be employed again in a similar position, or a judgment is collected upon, you will have spent tens of thousands of dollars with no practical benefit to your company.
A common occurrence at the outset of every case of this nature is obtaining a temporary restraining order (TRO) and an injunction. Usually the TRO will be obtained on the first date when the Court first hears the matter, and the injunction hearing will take place after an "answer" is filed which is where you can expect to see the most pushback from the other side. It can take several weeks to obtain a TRO, and once obtained, usually counsel will informally agree to continue the TRO until the injunction motion can be heard.
Another issue that can arise is whether the agreement is ambiguous or overly broad in its scope. An overly broad agreement can be problematic if you are seeking to enforce it in another jurisdiction. This is because some jurisdictions refuse to recognize broad non-compete and non-solicitation agreements where it is contrary to public policy. An arbitrator may be faced with the same issue if the choice of law was chosen improperly or the parties did not sufficiently establish that the arbitrator was familiar with the law of the appropriate jurisdiction.
If the person you are seeking to enforce the agreement against is now working for another competitor, you might consider sending a cease and desist letter to both the competitor and the person you were seeking to enforce the agreement against. A cease and desist letter is an argument ("cease and desist") that threatens to pursue legal action unless the recipient stops doing what prompted the letter. That being said, this should only be a last resort measure.
Most companies have HR policies concerning the terms of confidentiality and non-compete, non-solicitation and no-poach agreements. For example, the company might have an employee handbook and might require new employees to sign an acknowledgement of those policies. Because all employees may not work in the same location, the procedures might not be fully consistent. You should consult with an experienced employment or business attorney to make sure that your agreements conform with the law of your state and your company policies.
A few states such as California and Nebraska prohibit non-competes altogether. Many other states may be more likely to void or reject non-compete agreements where they are overly broad, and sometimes will use the doctrine of "reformation" to restrict the application of an agreement thereby leaving the parties as they were before the contract was entered into. Likewise, non-solicitation agreements can be problematic if they leave the client free to hire whomever they’d like regardless of whether that person violated the agreement. It is important to consider whether your company policies regarding non-compete agreements are appropriate for all states.
Non-Disclosure and Non-Solicitation Agreements and Lawyers
When it comes to non-disclosure and non-solicitation agreements, having a lawyer is essential for several reasons. First, there is a reason that lawyers spend up to three years of law school learning about contract law. We are well-versed in drafting contracts so that the intent of the writer is captured. This defect is often the basis for litigation. Second, we can ensure that your contracts are enforceable in your particular jurisdiction . Many non-compete agreements are not enforceable in California, as an example. You have to follow the laws of a particular state when dealing with non-competes. That’s why you need an attorney who has experience in both dealing with employers and employees, and litigating any section of these agreements when it turns sour. Finally, it is critical that you have a lawyer when entering into these agreements, as the stakes can become quite high when going against a former partner, employee, or client.